Why Throw Good Money After Bad?

That is the question of the day, as many underwater home owners are deciding to walk away rather than continue to pay their mortgages.

Case in point, Richard ''Rick'' Rochon's Boca Raton estate is scheduled to go on the auction block next month after failing to sell for $21.9 million. A lender started foreclosure proceedings in December on the 25,000-square-foot estate in Boca Raton's Royal Palm Yacht & Country Club community. The mansion features six bedrooms, seven bathrooms and three half-baths.

In an interview with The Miami Herald in April, Rochon conceded he stopped paying on the mortgage loan because the house is worth less than the loan. The lender claims it's owed about $12.5 million. Rochon insisted the foreclosure action was not a sign of personal financial problems.

''My position is, you know what, why throw good money after bad?'' he said. ''I'm treating this as an investment. This is not my house.''

Miami Proves Again It's a Banana Republic

A Miami-Dade Circuit Court judge discovered more than 15,000 foreclosure cases filed this year haven’t been served.

You read that right- 15,000.

The reason this is so alarming (other than the obvious) is that cases where homeowners haven’t been served within four months are subject to dismissal.

Civil Division Administrative Judge Jennifer D. Bailey made the discovery last month as she was taking stock of the circuit’s foreclosure load. She noticed 15,219 cases with no letters of correspondence, no answers and no motions to dismiss. “In other words, no service,” she said.

The circuit is scrambling to find the root of the problem, which could jeopardize most of this year’s 17,000 foreclosure filings. Most of the cases still fall within the four-month window, but no program is in place to speed things up. If a foreclosure proceeds to a default judgment with no service on the defendants, it could lead to a title dispute down the road.

For now, the Court is in full panic mode. "Let’s assume a third of these are subject to dismissal. In my spare time, I’ve got to figure out ways to generate orders in 5,000 cases and pay for 5,000 stamps and serve everyone,” Bailey said. “Are we going to do that? Yes. Am I trying to figure it out? Yes.” “It all starts with service. If people don’t get served, all we’re doing is buying ourselves a bunch of title cases in six years,” the judge said.

The system is beginning to break down under the sheer case load and cutbacks due to the economy and loss of revenue.

A Picture is Worth a Thousand Words.........

Any questions?

Baghdad Bob Makes a Comeback

Back in 2006, I suggested to a fellow blogger that the then Chief Economist of the NAR was akin to "Baghdad Bob", would say anything to perpetuate the real estate bubble regardless of the facts. We both made some posts on our blog about the similarity, and the name caught like wildfire. We know know by his own admission, that David Lereah didn't believe what he was telling the public. But he was paid by the NAR and he had to talk their book to the public. In essence, he was a company shill. A charlatan. For those of you that might not know Mr. Lereah, he authored the following two books.



This book on the left written in February 2005, right before the bubble burst. The one on the right (hard to tell the difference, isn't it?) was written in February 2006. Right at the top of the bubble. Lereah was famous for calling us non believers as "Chicken Littles".



One his more famous quotes was, "With sales stabilizing, we should go back to positive price growth early next year" —Lereah, NAR August 2006 existing home sales press release, September 25, 2006 .

Not to be outdone by his predecessor, current National Association of Realtors Chief Economist Lawrence Yun addressed his fellow Realtors in Coral Gables at the 2009 Real Estate Congress last week. Much like Lereah, Yun's predictions have been also completely wrong. Yet that doesn't seem to deter him from telling the faithful followers of the NAR what they want to hear. Good times are ahead! Yun, who never saw a housing market he didn't like, made the following observations.

On the current residential housing market, Yun continues to dispense with the Kool-Aid: “It looks like we’re now in a recovery process, particularly in boom-and-bust markets.” Sound familiar to Lereah in 2006?

How he can come up with that conclusion given the following statement he made at the same conference is any one's guess: “Unfortunately, foreclosures will continue to increase.”

Asked about his predictions of the past, Yun replied:“I didn’t think there could be a housing bubble. In hindsight, I was clearly wrong.”

So, Mr. Yun, you admit to not seeing the housing bubble despite the obvious warning signs, despite a number of other highly respected economists, bloggers, and media personalities warning about it? But now we should believe you because?

When a man has been dead wrong as much as Yun has been yet continues to talk the same nonsense, he earns the name "Baghdad Bob".

Congratulations Mr. Yun, you've earned it!

Build it and they will come.......

Used to be the mantra during the housing bubble. Thousands of unsold, unoccupied and often unneeded condos were built or proposed to be built. I remember seeing a report that there were some 50,000 condos either under construction or planned. That is about the same amount built over the past decade. Frequent visitors to Miami have witnessed the skyline littered with cranes and scaffolds. If you take a drive up A1A at night, you will see the thousands of empty, dark condos and unfinished projects.

What will happen to all of these?


An indication might be this example.

"A year after taking over a struggling condo project from Boca Developers, mezzanine lender Momentis Property Group is walking away from The Oaks I at Biscayne Landing in North Miami. Momentis, which seized the 373-unit property from Boca Developers in July after the developer defaulted on a construction loan, has agreed to hand the project over to iStar Financial, the senior lender."

According to the developers, the project had become “uneconomical” for it to own, meaning they can't turn a profit. iStar, acquired Fremont Investment & Loan in 2007, which loaned $123 million to Boca Developers in October 2005. Madeleine then lent an additional $275 million to cover Phase 1 of Biscayne Landing and other projects.

The Oaks is the first phase of Biscayne Landing. It was approved at the peak of the housing bubble in 2007. The developer planned 6,000 residential units, 180,000 square feet of office space, a 200-room hotel, 300,000 square feet of retail space and an Olympic training facility. In reality, Boca Developers built two towers with 373 condos.

Now, with the project a bust, iStar will take back 160 unsold condos at The Oaks. It will has to begin construction on the pool and other amenities promised in 2007, but they face the challenge of having to negotiate with the city and Boca Developers to acquire more space for those facilities. Plus, they are are responsible for paying down the construction loan and paying the condo assessments, taxes and insurance on the unsold units.

Building like these are common in Miami and other major metropolitan areas. They are a testament to the absurdity of the speculation that ran rampant during the last decade.These nightmares are now half empty, and will add to the foreclosure problem. The values have dropped more than 50%, and a high percentage of buyers never closed.

Much like the Tech bubble of 2000, the 'build it and they will come' scenario never came to be.

Leading by Example

Treasury Secretary Timothy Geithner bought this house on the left in 2004 for just over $1.6 million dollars. Now that he's living in D.C., he put the house up for sale. Bad timing Mr. Secretary. After reducing the price on his house to less than he paid for it, Geithner still couldn't find the next greater fool to buy it. Originally listed at $1.635 million in February of 2009, Geithner dropped the price to a mere $1.575 million. Unable to sell the house- even at a loss- the Secretary of the Treasury is reported to have rented out the house, for $7,500 a month.


But it gets better. Mr. Geithner has two mortgages on the property, totalling $1.25 million, plus a $27,000 annual property tax bill, plus home owner's insurance. I highly suspect he is cash flow negative.


Now I would have hoped that the person in charge of the Treasury, and a key figure in solving the housing crisis, would not become part of the problem himself. Unable to sell with two mortgages, cash flow negative, and an absentee landlord. What's going to happen when he owes more on the mortgages than it's worth?


Did I forget to mention Zillow.com estimates the house is worth $1.366 million and AOL Real Estate values it at ............$1.185 million?


Can he apply for a bailout?

Broken Arms

Adjustable-rate mortgages, or ARMs, the vehicle of choice during the housing boom, are now turning into a nightmare for those home owners that took them. ARMs have dominated mortgage delinquencies and home foreclosures. Nationally, 48 percent of subprime ARM loans were at least one payment past due in the MBA's latest report. In Florida, the subprime ARM delinquency rate was more than 60 percent. And, in the second quarter of 2008, Florida and California accounted for 58 percent of the nation's prime ARM foreclosure starts.


With home values dropping anywhere from 20 to 50%, returning values back to 2003 prices, most South Floridians with option ARMs are unable to refinance because their loan is upside-down, meaning they owe more than the house is worth.



Adding to the problem were all of the toxic ARMs that were developled during the bubble, to put people in houses they couldn't afford, and to pay higher commissions to the salesmen pushing them. Often called ''liar's loans'', these were often given to the borower without any income verfication (anyone remember Casey Serin?) , interest-only loans that often balloon when adjusting and ''option'' ARMs in which the homeowner initially may choose from a variety of payments, including one incredibly insane option that doesn't even cover the monthly interest amount, adding to the principal of the loan (so-called negative amortization).



Adding to the problem, rates are rising. Despite Bernanke and the Obama administration printing up hundreds of billions of dollars, and buying up hundreds of billions in Treasuries and MBS's, yields are higher than at the beginning of the year. The average rate for a 30-year loan jumped from 4.82 percent a week ago to 5,45 percent by the end of the week. Every 100bp increase means the borrower has about 10% less buying power, based on payment.



It doesn't really matter where rates are if you are in a negative equity situation, or if you lost your job. How many people have or want to write a check for $50,000 to refinance a house? Most people are stuck in these loans, and have to make the decision to either keep paying or walk way. As evidenced by the massive increase in foreclosures, it appears people are choosing the latter.


To get an idea of how large this problem is, for the next two years we are going to see about 50 billion dollars a month in resets or recasts. That is a ridiculous amount. If we are running at 40 to 60% delinquency rates now, what is going to happen when this next wave of inventory floods the market, depressing prices further?

I've Fallen and I Can't Catch Up

I commented yesterday that one in eight home borrowers in the US are behind on their mortgage payment. It's far worse in Florida, as about one in four borrowers was late on their mortgage or in foreclosure in the first three months of the year.

Remember when I told you to go outside and count the number of houses on your block? SURPRISE! Double the number of your neighbors from last night that are either delinquent or in foreclosure. If you have 20 houses on your street and they have a mortgage, 5 of your neighbors are in trouble. Which means you are in trouble.


An additional 99,000 Florida borrowers went into foreclosure in the first three months of the year, bringing the total number of home loans in some stage of the foreclosure process to 374,134. With 11 percent of its home loans in foreclosure, Florida ranked first in the country for defaults and was the only state in double digits. The rate was up roughly 2 percent from the previous quarter. To put it in perspective, the national rate was 3.85 percent, up about half a percent from the previous quarter, a record high. Almost half of all sub prime ARMs are past due or in foreclosure. In Florida, New Jersey and New York the number is above 55 percent.


At the end of March, about 71 percent of owners who bought in Miami-Dade and Broward counties in the past five years were underwater, according to Zillow.com. Just like I said yesterday, we are back to 2003 prices, on our way back to 1999 prices

Notice you have not heard a peep this year from either the FAR or NAR about the "Spring Buying Season", because we haven't had one. With the Summer here, potential families moving have already done so, if they could have.


Take a walk around your neighborhood this weekend. Go to Zillow or South Florida Block Shopper and look up the home sales for the past few years. When the prices were going up 20% a year, no one cared about affordability and how these people could afford the homes or how they financed them. We now know up to 75% were ARMs or other toxic loans.

And what about these government programs that threw hundreds of billions at this? Studies show between 65% and 75% of modified sub prime loans will fall delinquent by 60 days or more within 12 months of having been modified to keep the borrowers in their homes. Even loans whose principal was reduced by as much as 20% were still redefaulting in a range of 30% to 40% after 12 months.

This is not complicated folks. Houses are still too pricey. Those people that bought houses and either tried to flip them and got caught or simply couldn't afford them when they bought them, are not going to continue to pay regardless of any modification if they are 20,30, 0r 50% underwater! How difficult is this to understand?

Until we return to 1999 prices ( perhaps 1994 if this keeps up), purge the system of excess inventory, and sound lending practices, I do not see any "bottom" in sight. For those of you that like to see things in pictures, this chart by Robert Shiller is one of my favorites.

What a Long Strange Trip It's been..........

After a very loooong vacation, I've returned to continue my blog. There's so much more to comment on. So much more indeed.

Looking back on the posts from when I first started this back in 2006, it's scary to see both how accurate I was, and how insane the bubble was. Even though I still believe we are not yet close to the decline in prices. this is being called the "greatest Real Estate Bubble of the Century". With price declines of 50% and more in many areas, I would agree. But keep your seat belts on folks. We are only back to 2003 prices.Round two is coming which should bring us down to 2000 prices. More on that later.


We have witnessed so far trillions of dollars in house prices evaporate (wiping out equity and making millions underwater), trillions in wealth in the financial markets disappear. millions of jobs lost, over 300 lenders, dozens of banks, scores of builders, Bear Sterns, Lehman, Wachovia, Chrysler, GM ( next week), Circuit City, hundreds of retailers, malls, and countless other business go bankrupt. All in the last year. Despite trillions upon trillions of dollars thrown into this black hole, in a futile attempt to keep house prices artificially propped up to keep the bubble from popping. Trillions of dollars we don't have. Trillions of your, your children's, and your grand children's dollars.


Enough of the past. Fast forward to headlines from today-May 2009. One out of eight home borrowers ( notice I do not say home owners. The bank owns the home until it's paid off) are behind on their payments. One in eight. To put this in perspective, walk outside your house tonight, and count the number of houses on your street. One in eight of your neighbor's can't pay his mortgage. Hit "home" yet? Considering the bank recoups about 40-50% of "market value" on an REO sale, imagine two,three, maybe five of your neighbors going into foreclosure. Then calculate what your house is worth.


"The U.S. delinquency rate jumped to a seasonally adjusted 9.12 percent from 7.88 percent, the biggest-ever increase."

Remember when it was "contained" to only sub-prime?

"Prime fixed-rate home loans to the most creditworthy borrowers accounted for the biggest share of new foreclosures at 29 percent, MBA said, a sign job losses are hurting homeowners. "


As I predicted, Florida would be hit the hardest.

"About half of the new foreclosures were in four states: California, Florida, Arizona and Nevada, according to the report. Measuring both old and new defaults, 11 percent of all mortgages in Florida were in foreclosure at the end of the first quarter, the highest in the U.S. The inventory of new foreclosures and those already in the process of being foreclosed upon jumped to 3.85 percent, the MBA said. Half the loans now in foreclosure, adding the new and existing defaults, are held by prime borrowers, according to the trade group’s report."


Even at "depressed" prices, home sales are faltering.
"New home sales fell 34 percent in April from the year earlier period, the Commerce Department said today. The U.S. median home price tumbled 9.5 percent last year, the most ever recorded, according to the Realtors’ group. That’s more than six times the 1.4 percent drop in 2007, the first decline in the national median since the 1930s. ""

There are no more sheeple left to buy these McMansions.

" The unemployment rate increased to 8.1 percent in the first quarter, the highest since the end of 1983, according to the Bureau of Labor Statistics. "



Does it make sense to anyone over the age of five that we are at or near a bottom? Here's the deal folks, you were lied to. Repeatedly. By Bernanke, Paulson, Frank,Dodd, Geitner, the NAR, Bush, Obama, CNBC, and every other Real Estate Cheerleader that in spite of the huge flashing red sirens we were heading for a crash of epic proportions, told you to buy a house, or two, go into debt, real estate always goes up, buy now or be priced out.

And yet these same liars, con men, and spinmeisters are still given media coverage, still touted as "experts" to be listened to. These same charlatans that were wrong. more than wrong, and sometimes dead wrong. Many of them made fortunes while millions of you lost trillions.


Case in point, from today:
"This year, prices probably will fall 4.9 percent before posting a 4.4 percent gain in 2010, according to Lawrence Yun, the trade group’s chief economist."


Why would anyone give an ounce of credibility to this paid shill for the NAR when they have been wrong each and every year for the past decade? The last 'Chief Economist" for the NAR, David Lierah, ( now out on his own) has pretty much said he was paid to say all those rosy things about house prices and stuff. He was just talking his book. As my grandfather said, " Go ask a barber if you need a haircut. They will always say YES."


But I digress, it's been a while. Ok. I mentioned Round Two earlier. Here's why there will be a Round Two folks. We are merely in the eye of the Hurricane. That should be a very familiar metaphor for us Floridians. We've witnessed the front of the storm. It has not passed, we are in the calm that precedes the back half of the storm. A lot of people think that we've seen the worst, even some of my fellow housing "bears" are calling this a bottom or near bottom. There's talk about "green shoots", instead of preparing for a tsunami of inventory that will flood the markets and begin Round Two of falling prices.


What they fail to mention is that for the past few months there has been a quasi-moratorium on foreclosures. Remember when Obama asked for this and most banks complied back in early 2009? Most institutions with delinquent mortgages didn't foreclose. Well, that's over now and the rush to get properties on the market is coming. There has been billions on billions just thrown at this problem to stave off the inevitable crash. It will not stop it, it only resulted in a pause. An eye of the hurricane. Only 30 percent of foreclosed homes are currently on the market, meaning that some 500,000 sit vacant across the country, part of a vast “phantom inventory” that the market has yet to grapple with. Remember your neighbors?


Did I mention the wave (remember Hurricanes come in waves) of resets? We are approaching a second colossal reset and recast wave hitting the U.S. over the next few years. The resets are when the just the interest rate on your loan changes, but the recasts are when the payments change. That's what's going to up this hurricane a level or two. It's not a big deal if just the interest rate changes but when your payment doubles, your in trouble. Any of your neighbors move in over the past few years? I'll bet they have an ARM, ALT-A, NEG AM, or other toxic loan with almost no down payment and are under water.

Who's there to buy these houses? Potential buyers can't purchase homes when they are losing their jobs, or are already behind on their current mortgage, regardless of how attractive the credits and mortgages are. Banks have significantly tightened their guidelines. Mortgage rates are increasing. Foreclosures will begin to flood the market. Inventories will resume to swell. The price of homes will continue to fall until the properties are affordable for potential buyers. That's worth repeating. Prices will continue to fall until they are affordable- by conventional, old time standards and ratios of solid, verifiable, what the hell are you making and can you really afford it prices. I'm not even going to start with our ludicrous taxes or insurance problems.

I'll continue this in another post, but for now I will leave you with the chart on the left. They say a picture is worth a thousand words. Buckle up folks.